Korean defense stocks have weakened as the Middle East war drags on. Defense stocks typically rise when geopolitical tensions escalate. But growing concerns that contracts in the Middle East, a key export market, could be delayed have instead pushed share prices lower.
According to the Korea Exchange on the 20th, five major Korean defense companies — Hanwha Aerospace (012450.KS), Hyundai Rotem (064350.KS), Korea Aerospace Industries (047810.KS), Hanwha Systems (272210.KS), and LIG Defense & Aerospace — posted an average share price gain of 22.7% year-to-date as of the 16th of this month. That is about 39 percentage points lower than the KOSPI's gain (61.9%) over the same period.
By stock, Hanwha Aerospace rose just 0.2% from the start of the year, while Hyundai Rotem fell 15.4%. Korea Aerospace Industries (30.4%) and Hanwha Systems (20.4%) advanced but underperformed the KOSPI. Only LIG Defense & Aerospace, up 77.9%, exceeded the market return.
Defense stocks all surged immediately after the armed conflict between the United States and Iran began in earnest, on expectations of a wartime boom. But the mood shifted as the war dragged on.
Hanwha Aerospace fell 43% from its 52-week high recorded in March this year, while Hyundai Rotem dropped 44% from its April peak. Korea Aerospace Industries, Hanwha Systems, and LIG Defense & Aerospace corrected by 31%, 64%, and 33%, respectively. The five defense companies posted an average decline of 43%.
Analysts cite the possibility of delayed new orders from the Middle East as the biggest cause of the recent slump in defense stocks. With the ceasefire agreement between the United States and Iran effectively collapsing and tensions over the Strait of Hormuz continuing, the fiscal burden on ordering nations is growing and contract discussions could be delayed.
"The prolonged Iran war is actually a negative factor for Korean defense companies, which hold numerous pipelines in the Middle East," said Kang Tae-ho, an analyst at DS Investment & Securities. "What the market fears most is delays in new orders, and to maintain long-term earnings, continuous order acquisition is necessary."
The recent failure to win the Canadian submarine project (CPSP) also acted as a factor dampening investor sentiment. However, analysts noted that there is no need to broaden this into an interpretation of weakened competitiveness for Korean defense companies in the North Atlantic Treaty Organization (NATO) market.
"The Canadian project was heavily influenced by the joint procurement system among NATO countries and the existing maintenance, repair and operations (MRO) network," said Choi Jung-hwan, an analyst at Daishin Securities. "The impact is limited in the ground defense sector, such as the K9 self-propelled howitzer, which is already in operation in several European countries."
Some assess that earnings and long-term growth potential remain intact. In the second half, results are expected for large orders outside the Middle East, including the Spain K9 self-propelled howitzer joint development project and U.S. bids.
